All cases
Compare two incomes under a practice tax schedule
Marginal and effective tax · Fictional case
The situation
A fictional schedule charges zero on the first ₹3 lakh, 10% on the next ₹3 lakh and 20% above ₹6 lakh. Ignore all other adjustments.
Your task
What tax is due on ₹8 lakh and what does an extra ₹50,000 cost in tax?
Reveal step-by-step solution
Set up the problem
First ₹3 lakh is untaxed. Next ₹3 lakh incurs ₹30,000. Remaining ₹2 lakh incurs ₹40,000.
Work through the numbers
Total is ₹70,000 and effective rate = ₹70,000 ÷ ₹8 lakh = 8.75%.
Interpret the result
The extra ₹50,000 is taxed at the 20% marginal rate, adding ₹10,000. These brackets are fictional.
What to remember
Apply each rate only to the income inside its band and divide total tax by income for the effective rate.